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Oil sets record for three days straight

Business Materials 20 September 2007 02:10 (UTC +04:00)

( CNNMoney ) - Oil prices set another record high Wednesday after a government report showed crude supplies falling and a day after the Federal Reserve lowered a key interest rate.

U.S. light crude for October delivery rose 42 cents to settle at $81.93 a barrel on the New York Mercantile Exchange, a record closing high for the third day straight. Immediately following the report it touched an intra-day record of $82.50 before retreating.

In its weekly inventory report, the Energy Information Administration said crude stocks fell by 3.8 million barrels last week. Analysts were looking for a drop of 1.5 million barrels, according to a Dow Jones poll.

But gasoline supplies showed a surprise increase, which may be acting to limit the gain in the price of crude.

EIA said gasoline supplies rose by 400,000, compared to the 1.3 million barrel drop predicted by analysts.

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Distillates, used to make heating oil and diesel fuel, rose by 1.5 million barrels, slightly higher than estimates.

One trader said the EIA report was was fundamentally bullish, and that oil prices would eventually move higher as a result.

"It looks like the market just needs a break," Ira Eckstein, president of Area International Trading Corp., said from the NYMEX floor earlier in the session when crude prices actually turned slightly lower. "But I think we'll be over $85 in the next couple of weeks."

Several factors have contributed to oil's recent record run.

On Tuesday, the Fed lowered its key funds rate - an overnight rate it charges to banks and one that affects the amount people pay on everything from mortgages to credit cards - from 5.25 percent to 4.75 percent.

The cut sent oil prices higher, as traders bet it would stimulate economic growth and increase the demand for crude.

It also offered further assurance that fallout from defaults on subprime mortgages wouldn't spread to the wider economy. Oil has rebounded from the high $60s in late August as fears eased that the credit crunch wouldn't hurt overall economic growth.

But the Associated Press said energy traders may also be re-thinking their response to the Fed's decision, as some see the cut as a sign the economy may be in worse shape than they realized.

"That may not be a great sign of economic strength to follow," Tim Evans, an analyst at Citigroup Inc., told the AP.

The Fed cut also sent the dollar lower, as the lower interest rate makes some dollar-denominated investments less attractive for foreign investors.

The declining dollar over the last several months is another reason cited for oil's rise. Oil is priced in dollars worldwide, so producer nations like OPEC are less likely to increase production if the value of oil is declining. Also, a falling dollar makes oil less expensive for consumers outside the U.S., encouraging more consumption.

Although crude is at a record high in nominal terms, it is still below the inflation-adjusted highs of around $90 a barrel set in the early 1980s following the outbreak of the Iran-Iraq war.

Traders have also cited declining crude inventories in the U.S. and the threat of hurricanes knocking out production in the Gulf of Mexico as other reasons behind high oil prices.

In the inventory report, EIA said refineries operated at 89.6 percent capacity, less than expected and the first time refineries have operated at under 90 percent capacity for the last several weeks.

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